Is a Roth Conversion Right for You?

If the grass looks greener on the tax-free side of the retirement income fence, you may want to consider a Roth conversion.

In 2019, almost 46 million households owned Individual Retirement Accounts (IRAs), and the accounts held more than one-third of Americans’ retirement savings. Most of the money was saved in workplace retirement plans before being rolled over into IRAs, according to statistics from the Investment Company Institute. [1, 2]

When it comes to IRAs, there are two basic types of accounts: [3]

Traditional. Contributions to traditional IRAs often are made pre-tax. The money can grow and compound tax-deferred until retirement. When an individual takes a withdrawal from a traditional IRA during retirement (after age 59½), the distribution typically is taxed as ordinary income.

In addition, individuals must begin taking required minimum distributions (RMDs) at age 72, unless they reached age 70½ in 2019 or earlier. (In that case, they’re already taking RMDs.) [3]

Roth. Contributions to Roth IRAs are made with after-tax money. The money grows and compounds tax-free. When people take qualified distributions from Roth IRAs, they usually do not owe taxes on the amount withdrawn, as long as certain requirements are met.* Roth IRAs are not subject to required minimum distributions. [3]

*Roth contributions can be withdrawn at any time without penalty. Roth earnings can be withdrawn tax and penalty-free as long as a qualified distribution is taken at least five years after the year the first Roth contribution was made, at or after reached age 59½, after total disability or death, or upon meeting the requirements for a first-time home purchase.

Not everyone is eligible to open or make contributions to a Roth IRA. In 2020, people who have modified adjusted gross income equal to or greater than $139,000, if they file taxes singly, or $206,000, if they file taxes as married couples, are not eligible to contribute to a Roth IRA. [3, 4]

There is a way to get around the income restriction. A Roth conversion allows anyone, regardless of income level, to convert all or part of a traditional IRA account to a Roth account. The amount transferred from a traditional to a Roth IRA is treated as income and subject to ordinary income tax. As a result, account holders should carefully consider whether they can use non-retirement funds to pay taxes owed on the conversion. [5, 6]

Roth IRAs can be valuable legacy planning tools

Many people consider Roth IRA conversions because Roth IRAs have the potential to provide tax-free retirement income. Not everyone realizes Roth IRAs can provide tax-free income over generations. A Roth conversion can be an important part of a legacy planning strategy, especially today.

The 2017 Tax Cut and Jobs Act reduced taxes for many Americans, which made Roth conversions more attractive. Then, in 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated a provision known as the stretch IRA, which allowed non-spouse heirs to inherit IRA accounts and stretch distributions from those accounts over their lifetimes. [7, 8]

As a result of these changes, Roth IRAs have become powerful and attractive estate planning tools that can help minimize taxes over generations. The benefits of Roth conversions may include: [3]

  • Receive tax-free income. Having a source of tax-free income can help optimize retirement and tax planning strategies.
  • Keep your assets until you need them. Roth IRAs don’t have required RMDs. This means the accounts can grow and compound until you or your heirs need income.
  • Leave more for your heirs. If your beneficiaries have high incomes, they won’t have to worry about the potential impact of inherited IRA distributions on their taxes.

Roth conversions have many potential advantages, but they are not simple transactions. Traditional IRA owners should talk with their tax professional, financial professional, and/or estate planning attorney to determine whether a conversion makes sense. Among other things, the Journal of Accountancy suggests they should consider: [6]

  • Conversion alternatives, such as making qualified charitable distributions from traditional IRAs
  • The effects of conversion income on the calculation of taxable Social Security benefits and Medicare premiums
  • The effects of the conversion income on the qualified business income deduction, if applicable
  • The phaseout of many deductions, credits, and allowances

Bear in mind, there may be a limited window for conversion, however, because the new administration plans to “raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes,” reported the Tax Foundation. [9]

If you have questions about Roth conversions, please get in touch.

Sources:

[1] https://www.ici.org/faqs/faq/iras/faqs_iras

[2] https://www.ici.org/pdf/ten_facts_iras.pdf

[3] https://www.irs.gov/retirement-plans/traditional-and-roth-iras

[4] https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020

[5] https://www.irs.gov/publications/p590a#en_US_2019_publink1000230658

[6] https://www.journalofaccountancy.com/issues/2020/oct/roth-ira-conversion.html

[7] https://www.irs.gov/pub/irs-pdf/p5307.pdf

[8] https://www.journalofaccountancy.com/issues/2020/jul/secure-act-tax-changes.html

[9] https://taxfoundation.org/joe-biden-tax-plan-2020/

 

LPL Market Outlook 2021 Is Here

This week LPL Research came out with their 2021 Market Outlook.  Here is the latest blog post:

In our recent Market Signals video, LPL Financial Chief Market Strategist Ryan Detrick, and Equity Strategist Jeff Buchbinder discuss LPL Research Outlook 2021, focusing on the economy, policy, stocks, bonds, and more, including:

    • The Fed is here to stay in 2021.
    • A divided Washington could be a nice plus.
    • This economic cycle of growth could have years left.
    • Earnings will help justify higher multiples.
    • This bull market isn’t done.
    • Emerging markets still look like a nice place for investors.
    • A higher 10-year yield could hold back bonds.

You can watch the full discussion below and directly from our YouTube channel. Please be sure to subscribe to the LPL Research YouTube channel so you don’t miss anything! Also, if you like our channel, please give us a positive review—it helps more than you know!

Here are some highlights from the outlook:

2020 has been a tumultuous year, and as we near its close, we are pleased to present Outlook 2021: Powering Forward, which outlines our views on markets, the economy, and policy into 2021 and beyond.

 

Policy changes should be relatively benign, as we believe a split Congress is the most likely outcome, which should reduce the likelihood of more dramatic changes.

    • A fifth COVID-19 relief bill may be passed, but recent headlines have suggested the bill will be smaller in scale.
    • The Federal Reserve (Fed) is unlikely to reverse course on its accommodative policies.
    • Inflation risks may be skewed to the upside, an important consideration for the Fed going forward.

Economic growth should reaccelerate in 2021. Rising COVID-19 cases present the opportunity for a soft spot to begin the year, but may prove transitory.

    • We forecast 4–4.5% gross domestic product (GDP) growth in the United States and expect global gross domestic product (GDP) growth of 4.5–5%.
    • A swoosh-shaped recovery, characterized by a quick, sharp decline and then a partial snapback followed by a gradual recovery is the most likely scenario, in our view.
    • The rollout of a COVID-19 vaccine is needed to lift up the heavily impacted segments of the economy such as service industries.
    • A soft US dollar environment may persist amid the backdrop of dovish central bank policy and continued budget and trade deficits.

Stocks should see modest gains in 2021, and a strong earnings rebound could allow stocks to grow into their current valuations.

    • We see an S&P 500 Index fair value target range of 3,850–3,900 in 2021 with potential for further upside if the production of a vaccine exceeds expectations.
    • Growth-style stocks may continue to perform well next year, but we expect participation to broaden, which could boost cyclical value stocks.
    • Early-cycle positioning and prospects of a strong earnings rebound may provide a tailwind to small caps.
    • We maintain our preference for emerging markets equities over developed international given the stronger growth prospects of the region.

Bonds will present a more nuanced challenge for investors as interest rates rise amid the backdrop of an economic recovery and normalizing inflation.

    • Our target range for the 10-year Treasury yield is between 1.25% and 1.75%.
    • With modest return expectations for high-quality bonds, we recommend suitable investors consider positioning for a rising-rate environment.
    • We prefer an overweight to mortgage-backed securities and investment-grade corporates for suitable investors.

We believe 2021 could provide similar market performance as 2020—particularly if progress on a vaccine exceeds expectations—although we sincerely hope the path will be much smoother than what we experienced in 2020. Markets are forward-looking mechanisms, and as we receive further clarity on what the world may look like after the pandemic, we expect markets will reflect this.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

China’s Recovery Is On Solid Footing

China’s official purchasing managers’ index (PMI) for manufacturing expanded for the ninth straight month, rising to a better-than-expected 52.1—the highest level since September 2017. The services gauge at 56.4 was even stronger, highlighting China’s effective virus containment. As recoveries for the United States and Europe stall, China’s growth continues to stand out globally.

Closing out a strong November. The S&P 500 Index opened lower with COVID-19, strong China data, oil prices, and holiday shopping in focus. The index will try to end a very strong November on a high note after gaining 11.3% month to date.

    • OPEC plus (including Russia) is meeting to discuss an extension to output curbs.
    • Online spending on Black Friday rose 22%, offsetting the roughly 50% drop in store traffic (source: Adobe Analytics, Sensormatic Solutions).
    • Asian markets were broadly lower, led down by Hong Kong (-2.1%).
    • European markets are flat to slightly higher in midday trading.

Technical update. US equities decisively broke out last week, with all major indexes closing out the holiday-shortened week at record highs. Stocks are slightly lower this morning. The US dollar has broken down to its lowest level since April 2018. Copper is soaring to its highest level since March 2013.

COVID-19 news. After a new record daily case count of 194,979 on Friday, US case growth slowed over the holiday weekend, resulting in a 5.4% decline in the seven-day average over the prior week—its slowest since September 14 (source: COVID Tracking Project).

    • Hospitalizations had a similar 4.3% weekly decline in the seven-day average.
    • Moderna plans to request clearance for its coronavirus vaccine in the United States and Europe today.
    • The United Kingdom may approve the shot from Pfizer and BioNTech within days.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data are from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Rising COVID-19 Cases Could Pressure the Recovery

Economic Blog

COVID-19 cases have been rising in several regions around the world, prompting many countries to implement new restrictions to curb the spread of the virus. Governments in a few European countries have rolled out what has been dubbed “lockdown 2.0,” and high-frequency data in the region, highlighted in our blog Europe’s Lockdown 2.0 May Be Smarter, has shown a reduction in economic activity. While new restrictions are more targeted than those used in the spring, economies currently are in a more fragile position and some could even be at risk of a “double-dip” recession.

As shown in the LPL Chart of the Day, COVID-19 data in the United States has gotten worse in the fourth quarter. With conditions deteriorating and the weather getting colder, there is a growing risk that more restrictions will be enacted in the United States as well.  California and New York have already implemented some initial rollbacks such as nighttime curfews and school closings, while additional measures are being considered elsewhere.

View enlarged chart.

The US economy appears to be in a better position to withstand these curbs than it was in the spring, but unemployment remains high at 6.9%, and economic data for service-oriented industries has shown fading momentum in recent months. If the uptick in jobless claims last week is the beginning of a trend, consumer spending may decline, which could affect roughly 70% of the US economy.

“The worsening trends in COVID-19 data present a very real risk to an economy that remains on soft ground,” noted LPL Chief Market Strategist Ryan Detrick. “While recent news on vaccine progress has been a welcome development, the actual rollout of a vaccine could take longer than people realize.”

Even without new lockdowns, it appears that consumer behavior has already begun to react to the rise in cases, presenting a risk to economic activity regardless of any policy decisions to curb activity. Real-time data series like restaurant bookings through OpenTable have been declining in recent weeks, particularly since the acceleration in new case growth in October.

View enlarged chart.

Curiously, however, the stock market appears to be discounting the chances of new lockdowns—or at least the nature of them. As the S&P 500 Index sits near all-time highs, cyclical stocks are outperforming defensives, small caps have outperformed large caps, Treasury yields have been rising, and there’s been a rotation out of the “stay at home” stocks—certainly a very different market environment than we saw leading up to the March volatility. Recent progress on the path forward for a vaccine is a material development for a forward-looking mechanism like the stock market, and this may be what is altering the market’s perception of the risk of additional restrictions.

While a double-dip recession is not our base case and we are encouraged by the market’s resilience, the worrisome trend in COVID-19 data may have raised the chances of tripping up the recovery. We’ll continue to monitor real-time data indicators for insight on the path forward for the virus and the economy.

Image by Sumanley Xulx

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and Bloomberg.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

2 Reasons Long-Term Rates Could Continue to Rise

Market Blog  

Fixed-income investors aren’t used to having to deal with the volatility of stocks, but in the year that is 2020, that is exactly what has happened thus far. Unfortunately, while we don’t see the volatility of Q1 2020 continuing in 2021, we do believe that interest rates may continue to rise in 2021, and this may put more near-term pressure on bond returns.

Two technical reasons lead us to believe that the yield on the 10-year Treasury note has not only bottomed but could be headed higher in 2021.

Inverse Head and Shoulders Pattern

One of the most well-known patterns in technical analysis is the Head and Shoulders Pattern. A reversal pattern noted for its three points (left shoulder, head, and right shoulder) as well as the neckline, this pattern can also signal a reversal from a downtrend to an uptrend when the pattern appears to be upside down. As shown in Figure 1, we believe we are close to completing an inverse Head and Shoulders Pattern on the yield of the 10-year Treasury. A weekly close above the neckline near 0.95% would signal confirmation and target a move to just above 1.3%. The range from 1.3% to 1.5% also marks significant resistance for yields, as it was support for nearly a decade before breaking down in February.

View enlarged chart.

Lower for Longer Is Now Consensus

The fundamental arguments against higher rates are numerous. The economy is still recovering from a historic recession, COVID-19 cases are rising or hitting all-time highs in multiple regions of the country, and the Federal Reserve (Fed) has signaled it plans to keep short-term rates at zero for the foreseeable future. However, from a contrarian perspective, we believe there is a case to be made that “lower for longer” is now too consensus of a position, and that if the masses are already positioned for lower rates, those lower rates may be behind us. As shown in Figure 2, after consistently predicting higher interest rates throughout 2020 and revising forecasts lower as they fell, economists have been slow to revise forecasts higher even as yields have risen in recent months. In fact, the average forecast for the 10-year Treasury yield is now just 1.01% by the end of Q2 2021, implying barely a 10 basis point (.1%) move in rates over the next seven months.

View enlarged chart.

According to LPL Financial Chief Market Strategist Ryan Detrick, “The consensus expectation is that lower rates are here to stay. But with a vaccine potentially on the horizon, and parts of the economy recovering faster than expected, the biggest risk for fixed income investors may be a sharp move higher in rates.”

As a reminder, bond prices move inversely to interest rates, and a move toward 1.3–1.5% in 2021, combined with the low absolute level of interest rates could mean near-zero returns for the Barclays Aggregate Bond Index in 2021. The poor near-term outlook for bond returns remains one of several key reasons we continue to favor stocks over bonds heading into next year.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

3 Election Charts That Caught Our Attention

Stocks just had their best week since April, with the S&P 500 Index incredibly a chip shot away from new all-time highs. Joe Biden will be the next President of the United States, but markets are confident Republicans will maintain the Senate, and this means gridlock in Washington. Remember, gridlock is good, as it pulls policy towards compromise and avoids extremes. Also, any legislative changes to taxes, regulation, and capital gains will have meaningful input from both parties.

As shown in the LPL Chart of the Day, a split Congress tends to mean stronger stock returns, almost ignoring whether a Democrat or Republican is in the White House. The most likely outcome from the election at this point is a Democratic president with a divided Congress—a scenario that historically has produced solid S&P 500 returns of 15.9% a year.

View enlarged chart.

Assuming President-elect Joe Biden takes over in January 2021, it is important to note that historically stocks haven’t done as well the first and second years of a new president compared with an incumbent winning. This makes sense though, as  historically voters may have chosen new leadership in part because of economic weakness, and the uncertainty of a new president’s policies could also hold things back some. If things are good, the president tends to win reelection. Things turn around significantly by the third year in office, though, if there’s new leadership. Of course, it’s worth noting that the first year of a new president has seen the S&P 500 higher recently, with stocks up nearly 20% the first year under President Donald Trump (2017) and 23% under President Barack Obama (2009).

View enlarged chart.

Lastly, the strength from stocks around the election has been rather historic. “The S&P 500 added 1% on four consecutive days, which hasn’t happened since late 1982,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Although there are only three other times this rare blast of strength happened since WWII, it is worth noting that strong returns going out a year took place after each instance.” The bottom line: Extreme buying pressure has a funny way of resolving higher, and we don’t anticipate this time being any different.

  

View enlarged chart.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

An Election Pattern You Might Not Know About

Economic Blog

With Election Day coming up tomorrow, we at LPL Research thought we would add one last election forecaster to the mix of what we’ve presented over the last several months—as much because of what it might tell us about the American electorate as what it might tell us about the election.

As shown in the LPL Chart of the Day, since 1952, with surprising regularity, US voters have given each party a second term in the White House to complete its legislative agenda. With equal regularity, they have flipped the party in the White House after eight years, resetting the balance of power in our two-party system.

“For all the talk of partisanship, voters seem to have chosen a kind of slow moving balancing act for more than 60 years,” said LPL Research Chief Market Strategist Ryan Detrick. “It’s almost as if they’ve seen worthwhile ideas in both parties, but have also rejected both parties when an extended stay in the White House might have led to those ideas being taken too far.”

View enlarged chart.

The apparent pattern is really very simple. You get eight years to execute your agenda, so each party gets a second term. But once a party has been in the oval office for two terms, voters seek to reestablish balance. While the pattern did not work very well before 1952, with Democratic Presidents Franklin D. Roosevelt and Harry Truman holding the White House for five consecutive terms, since then it’s been right in 15 of 17 elections, or 88% of the time. President Jimmy Carter’s loss in 1980 and President George H.W. Bush’s win in 1988 were the only outliers.

While it is a little naïve to say presidential election outcomes are simply due to the electorate seeking balance, there still seems to be something to it. Perhaps voters wanted President Barack Obama’s steady hand coming out of the financial crisis in 2008, but after eight years they thought the pendulum had swung too far and it was time to put an emphasis on a more pro-business approach emphasizing deregulation and lower taxes—an overly simple story but certainly part of what had happened.

As Americans, we are a pragmatic nation. We always have been. It doesn’t mean we reject ideas or don’t seek new ways to pursue our democratic vision. But it does mean that we at least collectively understand that any idea taken too far starts to detach itself from what it was intended to accomplish in the first place.

What does the pattern say about 2020? The forecast would be for a second term for President Donald Trump so that he has a chance to follow through on his policy initiatives. But if former Vice President Joe Biden should win, the American people might be saying the pendulum had swung too far too fast in a single term and it was time to seek balance. But either way, it only works because people go and vote, so whatever your perspective, we encourage you to vote and add your own wisdom to our 2020 election outcome.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value

Your Retirement Savings and Change in Employment

Whether you leave an employer for a wonderful new opportunity or lose a position because of the pandemic, it’s easy to forget about the money you have saved in your retirement plan.

Sometimes, retirement plan savings can stay in a previous employer’s plan. Other times, your money can’t stay in the plan, and you need to take action or your employer may move your money. The circumstances depend on the type of plan the employer offers and the amount of money you have in your account.

What if my money is in a 401(k) plan?

The rules for distributions vary from plan to plan. If your old employer offered a 401(k) plan, then you may have several choices:

      1. Rollover your savings. Plan participants can rollover the money from an old employer’s plan into an Individual Retirement Account (IRA) or a new employer’s plan. There are some good reasons to choose a rollover. For instance:
        • There are no penalty taxes. When you choose to rollover savings directly (meaning you never receive the money) from one retirement plan into an IRA or another 401(k), there are no penalty taxes. All of your money keeps working for you with tax advantages.1
        • It’s easier to keep track. Many people change jobs every few years. Moving retirement savings from previous employers’ plans into one account can simplify things. You know where the money is, you know how it’s invested, and you can easily rebalance investments or make other changes.
        • There’s less administrative work. Even if you choose paperless options, having multiple retirement accounts means tracking more tax documents, remembering more passwords, and updating more accounts when your address or personal information changes. Consolidating your assets can simplify things.

When deciding whether an IRA or a new employer’s plan is the right choice for a rollover, it’s important to compare investment options and fees.

      1.   Withdraw your savings. Plan participants can withdraw their retirement savings when they leave an employer or change jobs. The catch is, if you take a withdrawal before age 59½, you may lose as much as half of your savings to income and penalty taxes.2

Once you receive a check, you can rollover your savings into an IRA or a new retirement plan. However, if income taxes have been withheld – employers usually withhold 20 percent for income taxes – you’ll have to make up the difference to complete the rollover and avoid all income and penalty taxes.2

The CARES Act created special rules for withdrawals taken during 2020. If your plan adopted the new rules, you may be able to take a penalty-free distribution before age 59½.3 If you would like to learn more about CARES Act provisions, including whether you qualify for a CARES Act withdrawal, please get in touch.

      1.   Do nothing. The reality is financial decisions often inspire inertia. It’s easier to do nothing than to gather the information needed to make a confident decision. As a result, many people leave their retirement savings in former employers’ plans.

That’s okay if you have more than $5,000 in your plan account. However, if you have less than that amount, your employer may have the right to take action and move the money out of the plan:1

        • If you have less than $1,000 in your account, the plan may send you a check with 20 percent withheld for income taxes. The penalties and rollover options are similar to those you have when savings are withdrawn.
        • If you have between $1,000 and $5,000, the employer may automatically rollover your savings into an IRA offered through a provider selected by the plan sponsor.

While it can be tempting to do nothing, when it comes to retirement plan savings, it’s better to take time, consider your options, and make a choice that suits your needs.

What if my money is in a SIMPLE or SEP IRA plan?

Smaller businesses have been particularly vulnerable to pandemic disruption. Often small businesses offer different types of retirement plans, such as Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA plans. The options are similar to those of 401(k) plans, but there are significant differences. For instance, plan participants can take withdrawals from SIMPLE and SEP IRAs at any time. Withdrawals may be taxed as ordinary income and subject to penalty taxes if the participant is younger than age 59½:4

    1.   SIMPLE IRAs have a two-year holding period. SIMPLE plan options are similar to 401(k) plan options. Plan participants, typically, can leave money in the plan, take a withdrawal, or rollover their savings. For withdrawals and rollovers into accounts other than another SIMPLE IRA:5
      • If your money has been in the SIMPLE IRA for two or more years, income taxes may be withheld and a 10 percent penalty tax may be owed, depending on your age.
      • If your money has been in the plan for less than two years, a 25 percent early distribution penalty may be assessed.
    1.   SEP IRA plan rules mirror those of traditional IRAs. Plan participants, typically, can:4
      • Rollover savings directly into another type of IRA to avoid penalty taxes and keep tax advantages.
      • Take a withdrawal, although any money withdrawn before age 59½ is subject to income and penalty taxes. After a withdrawal, the participant has 60 days to rollover the money (including any money withheld for income taxes) into a new retirement plan option.
      • Leave the money in the SEP IRA.

The rules governing retirement plans can be complex. Before making any changes to your retirement plan accounts, talk with your tax and financial professionals.

Sources:

1 https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

2 https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers

3 https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-H638004C502804947B4CFB9B4B770C2F2 (Section 2103)

4 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

5 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-distributions

5 Charts We Are Watching

Market Blog

There are many charts that caught our attention this week, and today we share the top 5 charts we’re watching.

The S&P 500 Index recently had a four-week losing streak and fell nearly 10% along the way, while the Nasdaq and many large-cap tech stocks fell even more. Then in a big move higher over the past two weeks, many stocks moved from oversold to overbought in a very quick timeframe.

As the LPL Chart of the Day shows, more than 90% of the components in the S&P 500 were beneath their 10-day moving average on September 24 and within two weeks saw more than 90% above this short-term trend line. This type of buying thrust is consistent with future strong returns, suggests quick reversals from oversold to overbought are a good thing and could bode well for stocks to outperform bonds well into 2021.

View enlarged chart.

Parts of the economy are opening back up, while employment continues to disappoint. One specific area that continues to improve is how many people are flying, as the seven-day average number of travelers going through Transportation Security Administration (TSA) checkpoints hit a new recovery high. We discuss other high-frequency data points in our COVID Surge Stalling Europe’s Recovery blog.

View enlarged chart.

We’ve noted before that stock market gains ahead of the election historically support the incumbent party, while if stocks are lower it tends to support new leadership in the White House. Taking this further, the US dollar also tends to send signals for who might win. In fact, when stocks are up and the US dollar is lower ahead of the election, or if stocks are lower and the US dollar is higher before an election, the results have accurately predicted the last seven times those scenarios took place. Given stocks are up and the US dollar is slightly lower, this could be one clue the upcoming election will be much closer than many are expecting.

View enlarged chart.

Sticking with the election, many investors are worried about higher taxes and more deregulation if former Vice President Joe Biden wins. “Higher taxes may be one part of it, but Biden is also looking at huge spending initiatives,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Stock markets like spending, and this could more than help offset potentially higher taxes.” Lower tariffs could potentially provide another offset as well.

View enlarged chart.

Last, Friday’s retail sales report came in better than expected, marking five consecutive months of year-over-year gains. It is worth noting the economy has never been in a recession after 4 or more consecutive monthly gains. Still, in the face of one of the most severe recessions ever, it took only a few months for sales to get back to new highs, as shown below. Historically, new highs in retail sales happen in expansions—and this is yet another clue the recession is likely over.

View enlarged chart.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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Being Financially Savvy is A Family Business

Being Financially Savvy is A Family Business

Like it or not, we’re all involved in running the “family business.” We worry that our parents might outlive their retirement savings, we are worried about our kids going to college, and what our own role in both might be. We’re often comforted by the thought that family members would probably bail us out if we got into money or personal trouble. We strive to help our children financially, and we’d like to bequeath them at least part of our nest egg. Families in the United States are an important part of the social construct. Families care for one another.

In short, our family is our asset, liability, and legacy. Now here’s the contention: It’s time to build this notion into the way we manage our money. Many people are willing to help their family members out financially, so we should recognize this, not just ignore it.

Here are just some of the reasons why:

Raising Children: Parents do have a legal responsibility to care for their children. If you are fortunate enough, you might want to continue this financial support into college years and beyond. However, that can be a drain on your own wealth and perhaps even hinder your retirement savings.

If you don’t want your adult children swimming in credit card debt, missing mortgage payments, and constantly asking you for money, start by teaching your children financial literacy and best practices at a young age. This is how most people learn about money. Try your best to instill in them positive financial behaviors from a young age. Even if you are not born into wealth, you can teach financial literacy to your children.

That’s trickier than it seems. Children can grow up sheltered from the money talks at home, only seeing spending and not earning, budgeting, and saving. After all, for children, all purchases are free, so why should they fret about the price tag or control their desires? Instead, teach children the basics of money, about earning money, and the importance of saving.

One way to do this is to make your children feel like they’re spending their own money. Give them an allowance when they are younger based on doing chores, and a clothing allowance when they are teenagers and insist they live within this budget. This way, instead of you constantly saying “no” to your children, they will learn to say “no” to themselves. They will also learn the benefits of positive spending habits.

Launching Adults: Once your children get into the workforce, you want them to get into the saving and investing portion of their financial life cycle where they are steadily building wealth. However, if they do not understand debt, they can fall behind quickly and struggle to ever catch back up.

It is also important to discuss student loans and credit cards with your young adult children. These types of easy access funds can quickly have a snowball effect, because the young adult can quickly borrow and push off the pain of repayment into the future.

If your young adult children can start down a positive financial path early on, the easier it will be for them to meet their goals and less of a financial drain on you. To that end, encourage your children with your words and with your fine example. We don’t have a duty to just support our kids financially, but to teach them how to be financially independent later in life. This starts with the basics of financial literacy.